For over a year now, Wall Street has been painting smiles on investors’ faces. After the turbulent market events in 2022 for iconic indices like the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, these same indices have made a strong comeback, reaching record highs in 2024.

The current bull market has been fueled by a mix of factors, including lower inflation and the robust U.S. economy. However, much credit is owed to the “Magnificent Seven,” a group of powerful businesses that have played a key role in this market resurgence.

The Dominance of the Magnificent Seven Stocks

The Magnificent Seven stand tall as some of the largest and most influential businesses globally, commanding immense sales and driving innovation. Positioned according to market capitalization, these companies have not only outperformed major stock indexes but also maintain solid competitive advantages.

Microsoft: Leader in desktop operating systems and cloud services.
Apple: Holds a significant share in the smartphone market and executes massive stock buybacks.
Nvidia: Dominates the GPU market, especially in high-compute data centers.
Amazon: A powerhouse in e-commerce and cloud services through AWS.
Alphabet: Google’s parent company, a search engine giant and owner of YouTube and Google Cloud.
Meta Platforms: Home to the social media behemoth Facebook and other popular apps.
Tesla: Leading producer of electric vehicles and a profitable EV manufacturer.

While these seven stocks have been stellar long-term investments, their future prospects vary significantly, starting with their current valuations.

Evaluating the Magnificent Seven’s Valuations

Assessing the valuations of public companies is subjective, with one investor’s pricey stock being another’s bargain. The price-to-earnings (P/E) ratio is a classic measure of value. The forward P/E ratio, which considers consensus earnings for the upcoming year, is a forward-looking tool widely used on Wall Street.

Based on Wall Street’s estimates as of March 13, the Magnificent Seven ranked from cheapest to most expensive using the forward P/E ratio:

Alphabet (GOOGL): 17.83
Meta Platforms: 21.56
Apple: 23.9
Nvidia: 30.43
Microsoft: 31.07
Amazon: 33.95
Tesla: 41.14

For context, the S&P 500 and Nasdaq 100 have forward P/E ratios of 21.1 and 31.32, respectively. Amazon and Tesla appear relatively expensive based on earnings potential, while Alphabet and Meta Platforms present as potential bargains.

However, the forward P/E ratio might not capture the full valuation story for these innovation-driven companies. A more comprehensive measure is necessary

A Deeper Dive into Valuation: A Fresh Perspective

These seven remarkable companies not only dominate their sectors but also reinvest significantly in growth and innovation, signaling a need for a more nuanced approach to their valuations.

Unlocking the Treasure Trove of Alphabet’s Stock Potential

The Valuation Game: Investigating the Magnificent Seven Stocks

Today’s market is akin to a treasure hunt, with astute investors seeking out stocks that may not shine brightest on the surface but harbor immense potential beneath. The Magnificent Seven stocks are a testament to this quest, where companies opt to funnel operating cash flow back into their businesses for enhanced long-term growth.

Unveiling the True Value

Trade wisdom dictates that analyzing the cash flow multiple of a company relative to its forward-year consensus is the strategic key to unlocking the true value of these market dominators. Let’s delve into how the Magnificent Seven stocks stand in terms of this metric:

Alphabet (Class A shares, GOOGL): 12.53 times the next year’s cash flow
Amazon: 12.8
Meta Platforms: 13.19
Apple: 21.1
Microsoft: 24.15
Tesla: 27.38
Nvidia: 30.59

In this jungle of valuation, Microsoft, Tesla, and Nvidia loom large, creating a challenging terrain for growth-oriented investors. Tesla faces tumbling operating margins, while Nvidia braces for stiff AI GPU competition.

Contrastingly, the horizon beckons opportunities with Amazon’s historically favorable valuation relative to its future cash flow. Meanwhile, Meta Platforms presents a compelling case at just 13 times forward-year cash flow.

Alphabet: A Hidden Gem

Within the ensemble, Alphabet shines as the brightest star, offering itself as a bargain to discerning investors. Not only is Alphabet the most economical member in terms of the forward P/E ratio, but it also boasts a profound operational prowess.

Central to Alphabet’s radiance is its cornerstone segment, Google, which commands a commanding 92% share of global internet searches. This supremacy positions Google as the go-to platform for advertisers, enabling robust ad-pricing power.

Beyond advertising, Google Cloud emerges as a force to reckon with, marking its maiden operating profit in 2023 after years of losses. The buoyant margins in cloud services and the nascent stage of enterprise cloud expenditure delineate Google Cloud as Alphabet’s ace in the hole for cash-flow expansion in the decade ahead.

The market whispers that a prudent eye would catch Alphabet in its grandeur, as the data weaves a promising narrative for those willing to discover the hidden gem in the Magnificent Seven stars.

Before making your voyage into Alphabet’s stock, ponder this: while it may not be among the top 10 current stock picks by the Motley Fool Stock Advisor, Alphabet’s voyage could potentially reap lucrative rewards in the times to come.

So, dear investors, in this sweeping landscape of stocks, the treasure map hints at Alphabet as a trove waiting to be unearthed. Will you embark on this voyage of discovery?

*Stock Advisor returns as of March 11, 2024